A swap which is composed of two financial instruments: one with a fixed return and the other with a variable return. In other words, the asset swap is an instrument that combines an interest-rate swap with a bond, thus featuring the characteristics of both cash market and credit derivatives market. The asset swap market, a major segment of the credit derivatives market, helps set the price of credit over LIBOR. The spread over LIBOR is a measure of credit risk of bonds.

The asset swap is usually used to transform the cash flow characteristics of reference assets in such a way that currency, credit and interest rate risks can be hedged, so investors can create synthetic investments with more favorable, tailor-made cash flow characteristics. In this type of swaps, the investor takes a long position in a bond and enters into an interest rate swap with the issuer of the bond. Technically speaking, the investor pays fixed (fixed coupon amounts) and receives floating (LIBOR-based floating coupon).